Considered and decided by Ross, Presiding
Judge; Shumaker,
Judge; and Wright,
Judge.

U N P U B L I S H E D O P I N I O N

WRIGHT, Judge

In
this appeal after a bench trial, appellants challenge the district court's determination
that they committed fraudulent or intentional misrepresentation by omission,
arguing that (1) they did not have a duty to disclose certain financial
information to respondent; (2) the record does not support the finding that
respondent reasonably relied on appellants' failure to disclose certain
financial obligations; and (3) respondent is not entitled to damages for omission
of the financial information. We affirm.

FACTS

Respondent
Russell Trenholme is a former Minnesota
resident currently living in California. Trenholme is an investor who, before his
investment at issue in this litigation, had invested in several high-tech
ventures that failed. The three corporate
appellantsQRS Diagnostic, LLC; QRS Systems, LLC; and Parachute Technologies,
LLCare Minnesota limited-liability corporations with related ownership and
control. Appellant Spencer Lien is
president, CEO, and chairman of the boards of both QRS Diagnostic and QRS
Systems. Lien directly owns less than
one percent of QRS Diagnostic. But Lien
owns 50.5 percent of QRS Systems, which owns 10 percent of QRS Diagnostic. Lien and Jim Cooper, the principal investor
in QRS Diagnostic, comprised QRS Systems' board of directors.

QRS
Diagnostic develops, manufactures, and sells medical devices. The medical devices primarily utilize PC
cards, which are credit-card-size personal-computer adaptors that enhance the
memory capacity of a portable computer. Since
1999, QRS Systems has not conducted any business operations other than its
involvement with Parachute. Its only
assets are shares of stock in QRS Diagnostic and Parachute.

In
May 2001, QRS Systems and UniLinear signed a technology-licensing agreement and
formed Parachute to develop, manufacture, and sell a PC-card adapter for the
Palm Pilot handheld computer (Parachute device). The Parachute device attaches to the back of
the Palm Pilot and contains a PC-card slot, thereby adapting a Palm Pilot to
use PC-card technology. The hardware and
software for the Parachute device were developed by UniLinear Corp.

QRS
Systems initially owned 80 percent of Parachute, and UniLinear owned 20
percent. Because Parachute's operations
were being financed by QRS Diagnostic, identifying investors and acquiring
venture capital were priorities. Lien knew
Trenholme from one of Trenholme's previous investments that failed. Because of this acquaintanceship, Trenholme had
become an investor in QRS Diagnostic.
Lien contacted Trenholme to solicit his investment in Parachute. Lien told Trenholme about potential sales of
the Parachute devices and called the investment "hot." Because of his earlier failed investments,
Trenholme cautiously expressed interest in making an investment.

After
negotiations, Trenholme signed a letter of understanding regarding his
investment in Parachute on June 6, 2001.
In the letter, Trenholme agreed to provide a cash investment of $250,000
and a personal guarantee of $150,000 on a bank line of credit to be obtained by
Parachute. The letter of understanding described
Parachute's intentions to seek a line of credit of at least $250,000 and requested
that Trenholme "agree to consider providing a personal guarantee of up to an
additional $100,000" if more than one bank was unwilling to provide credit to
Parachute.

After
Parachute was denied a line of credit, Lien and Trenholme engaged in further negotiations
to designate Trenholme along with Parachute as borrowers on the line of
credit. Trenholme asked Lien to have
"QRS" guarantee the line of credit. Lien
insisted that QRS Systems, rather than QRS Diagnostic, "co-guarantee" the line
of credit because QRS Systems was "the majority owner of Parachute
Technologies." Trenholme and Lien agreed
to this arrangement.

The
line of credit originated on July 25, 2001, and was signed by Trenholme and
Lien in his capacity as CEO of Parachute.
Concurrently with the execution of the promissory note, Lien, as
chairman and CEO of QRS Systems, signed an indemnification agreement through which
QRS Systems agreed to indemnify Trenholme as the guarantor of the line of
credit. The agreement stated that "QRS
Systems, LLC will be fully liable to [Trenholme] for up to 50% of the monetary
amount that [he has] to pay to Associated Bank in the event of default by
Parachute Technologies."

During
the second half of 2001, Parachute struggled to succeed. The Parachute devices experienced hardware
problems, and the company could not keep pace with the development of new Palm Pilot
devices. UniLinear failed to accept the
Parachute device to work with the next generation of Palm Pilot devices, making
the existing Parachute devices obsolete.

In
January 2002, Lien sought an additional $50,000 from Trenholme to sustain the
company until another investor could be found.
Lien solicited the additional investment to "keep the product
development going" and to protect Trenholme's original investment. Trenholme made the additional
investment. But additional investors
were not obtained.

When
the line of credit came due in July 2002, Trenholme sought a 50-percent
contribution from QRS Systems. Lien
replied by letter to Trenholme's request as follows:

You are correct in
asserting that QRS Systems has provided you a guarantee so you can send QRS
Systems a request for reimbursement after you have paid off the note with the
bank. However, QRS Systems does not have
$75,000 to reimburse you at this time.
QRS Systems is a company that currently has all its assets secured
against a $600,000 note. The company's
assets are only its ownership in QRS Diagnostic and Parachute
Technologies. As soon as QRS Diagnostic
begins to produce dividends for its members, QRS Systems will have an income
and can begin to repay its debts.

Lien also advised
the bank that Parachute did not have the funds to pay off the line of
credit. Consequently, Trenholme paid the
line of credit in full.

In
its findings of fact, conclusions of law, and order for judgment dated August
17, 2005, the district court concluded that Lien, Parachute, and QRS Systems
were jointly and severally liable to Trenholme in the amount of
$201,485.41. The district court determined
that Trenholme proved his cause of action for breach of the loan-agreement
contract by QRS Systems because QRS Systems failed to pay its portion of the
$150,000 guarantee when it came due. The
district court also concluded that Lien, Parachute, and QRS Systems are liable
for fraudulent or intentional misrepresentation because they omitted material
information regarding the financial capacity of QRS Systems to guarantee the
line of credit. This appeal followed.

D E C I S I O N

Appellants
contend that the district court erred when it determined that Trenholme had
established a claim for fraudulent or intentional misrepresentation by
omission. We review the district court's
findings of fact, whether based on oral or documentary evidence, for clear
error, giving due regard to the opportunity of the district court to judge the
credibility of the witnesses. Minn. R. Civ. P.
52.01. In doing so, "we view the record in the light
most favorable to the judgment of the district court." Rogers v. Moore, 603 N.W.2d 650, 656 (Minn. 1999).
"That the record might support findings other than those made by the
[district] court does not show that the . . . findings are defective." Vangsness
v. Vangsness, 607 N.W.2d 468, 474 (Minn.
App. 2000). As to issues of law,
however, we conduct a de novo review. Modrow v. JP Foodservice, Inc., 656
N.W.2d 389, 393 (Minn.
2003).

I.

Appellants
first argue that, because they did not owe a duty to disclose the financial
status of QRS Systems to Trenholme, he has not satisfied the requirements for fraudulent
or intentional misrepresentation. The
elements of fraudulent or intentional misrepresentation are:

(1) a representation;

(2) the representation must be
false;

(3) the representation must
deal with past or present fact;

(4) the fact must be material;

(5) the fact must be
susceptible of knowledge;

(6) the representer must know the
fact is false or assert it as of his own knowledge;

(7) the representer must
intend to have the other person induced to act or justified in acting upon it;

(8) the other person must be
induced to act or justified in acting;

(9) that person's actions must
be in reliance upon the representation;

An
omission or concealment of a material fact can constitute fraud when the fact
is within the concealing party's knowledge and that party knows that the party from
whom the material fact is concealed acts on the presumption that such fact does
not exist. Richfield Bank & Trust Co. v. Sjogren, 309 Minn. 362, 365, 244 N.W.2d 648, 650 (1976). But nondisclosure constitutes fraud only when
the party concealing the material fact is under a legal or equitable obligation
to communicate that fact to the other party who in turn is entitled to
disclosure of the material fact. Id.

Ordinarily,
one party to a transaction does not have a duty to disclose material facts to
the other. Klein v. First Edina Nat'l Bank, 293
Minn. 418,
421, 196 N.W.2d 619, 622 (1972). Special
circumstances, however, may dictate otherwise.
Id. Traditionally, three examples of special
circumstances are cited. Id. First, "[o]ne who speaks must say enough to
prevent his words from misleading the other party." Id. Second, "[o]ne who has special knowledge of
material facts to which the other party does not have access may have a duty to
disclose these facts to the other party."
Id. Third, "[a] duty to disclose facts may exist
when a fiduciary relationship exists between the parties . . . ." Heidbreder
v. Carton, 645 N.W.2d 355, 367 (Minn.
2002).

The
district court found that all three of these special circumstances existed
between appellants and Trenholme. But
our analysis focuses on the fiduciary relationship between the parties. "The relationship among shareholders in
closely held corporations is analogous to that of partners." Pedro
v. Pedro, 489 N.W.2d 798, 801 (Minn.
App. 1992), review denied (Minn. Oct.
20, 1992). Those shareholders "owe one
another a fiduciary duty." Id.

Given
the interrelated nature of the ownership and control of the companies by Lien, a
fiduciary relationship existed among the parties. The line of credit was for the benefit of
Parachute, in which Lien, Trenholme, and QRS Systems were all
shareholders. By virtue of his $250,000
investment and the agreement between Lien and Trenholme memorialized in the letter
of understanding, Trenholme owned a 10-percent share of Parachute. Lien owned a majority share of QRS Systems,
which owned 54 percent of Parachute. Both
Lien and Trenholme were directors of Parachute.
And Lien was president, CEO, and chairman of Parachute. Even accepting as true appellants' contention
that QRS Systems was an independent third-party company, as a shareholder in
Parachute, QRS Systems owed the same fiduciary duty that Lien owed to
Trenholme.

In
light of the fiduciary duty among QRS Systems, Trenholme, and Lien, Lien owed Trenholme
a duty to disclose the material fact that QRS Systems lacked the financial capacity
to guarantee the line of credit because its holdings were encumbered by a
$600,000 debt. That omission, if justifiably
relied on by Trenholme to sign the promissory note, is sufficient to establish
fraudulent or intentional misrepresentation.
Accordingly, the district court did not err by concluding that the
parties were in a fiduciary relationship and, therefore, appellants had a duty
to disclose such material financial information to Trenholme.

II.

Appellants next argue that it was
not reasonable for Trenholme to rely on Lien's omission regarding QRS Systems'
ability to guarantee the $150,000 line of credit. To establish fraudulent or intentional misrepresentation, a
plaintiff must establish that he or she acted in reliance on the
misrepresentation, which resulted in damages.
Spiess v. Brandt, 230 Minn. 246, 250, 41
N.W.2d 561, 565 (1950). It is a "well-established
rule that in a business transaction the recipient of a fraudulent
misrepresentation of a material fact is justified in relying upon its truth,
although he might have ascertained its falsity had he made an
investigation." Id.
at 253, 41 N.W.2d at 566. In determining
whether reliance was justified, the question is whether the fraudulent
misrepresentation or omission was reasonably calculated to deceive, not the
average person, but "a person of the capacity and experience of the particular
individual" who was deceived. Id. at 254, 41 N.W.2d at 567; see Murphy v. Country House, Inc., 307
Minn. 344, 351, 240 N.W.2d 507, 512 (1976) ("Fraud is proved with reference to
the specific intelligence and experience of the aggrieved party rather than a
reasonable-man standard.").

At
oral argument, appellants argued for the first time that the district court's
finding of reasonable reliance was a conclusion of law, subject to de novo
review. But appellants' contention is
contrary to the general rule that whether the plaintiff's reliance was
reasonable is a question of fact. Berg v. Xerxes-Southdale Office Bldg. Co., 290 N.W.2d 612, 616 (Minn.
1980) (holding that it is incorrect to rule on reasonableness of reliance as a
matter of law because whether reliance was reasonable must be determined as a
matter of fact based on party's personal circumstances). Thus, to warrant reversal, the district
court's factual findings as to reasonable reliance must be clearly erroneous or
"manifestly contrary to the weight of the evidence or not reasonably supported
by the evidence as a whole." Rogers,
603 N.W.2d at 656(quotation
omitted).

Appellants
maintain that Trenholme's reliance was unjustified because Trenholme was a
sophisticated investor who should have understood that Trenholme and Lien were
in an "adversarial relationship." But
this assertion is at odds with the fiduciary relationship that Trenholme and
Lien shared through Lien's roles as president, CEO, and chairman of Parachute
when he proposed that Trenholme, also a board member and shareholder of
Parachute, co-sign for the line of credit with QRS Systems as guarantor.

Given
the fiduciary nature of the relationship among the parties, the evidence
supports the district court's conclusion that it was reasonable for Trenholme
to rely on Lien to disclose material facts about the financial ability of QRS
Systems, a company in which Lien was a board member and part owner, to
guarantee the line of credit when Lien asked Trenholme to co-sign with
Parachute as borrowers for the $150,000 line of credit. Lien failed to disclose to Trenholme that QRS
Systems was a company with $600,000 in debt and its ownership of two
unprofitable companies were its chief assets.
Rather, he implied that QRS Systems as majority owner of Parachute was
fiscally sound and capable of guaranteeing the line of credit. Trenholme testified that he would not have co-signed
for the line of credit in July 2001 if he had been aware of QRS Systems's debt of
$600,000 to Cooper. Six months later, in
January 2002, when Trenholme balked at making an additional $50,000 investment
in Parachute, Lien persuaded Trenholme to invest the additional $50,000 by
sending Trenholme an email that stated: "If
you don't want to put any more money in -- I understand. I'll find someone else. However, to protect your original investment,
if you would put in $50,000 (under the same terms of your last investment),
then we can keep the product development going."[1]

Appellants
argue that Trenholme should have made inquiries into the capacity of QRS
Systems to guarantee the line of credit. This argument fails because Trenholme had no
such duty. When "a party to whom a
representation has been made has not made an investigation adequate to disclose
the falsity of the representation, the party whose misstatements have induced
the act cannot escape liability by claiming that the other party ought not to
have trusted him." Davis v. Re-Trac Mfg. Corp., 276 Minn.
116, 119, 149 N.W.2d 37, 39 (1967).

When
we examine the record in the light most favorable to the district court's
findings, it supports the district court's determination that Trenholme
reasonably relied on Lien's representations and omissions regarding the capacity
of QRS Systems to guarantee the line of credit.
Thus, the district court's determination as to reasonable reliance is
not clearly erroneous.

III.

Appellants
also argue that Trenholme was not damaged by Lien's omission regarding the
financial capacity of QRS Systems to guarantee the line of credit. Appellants maintain that, because Trenholme agreed
to guarantee the line of credit when he invested in Parachute, he incurred the
same liability by co-signing as a principal borrower when Parachute defaulted. That is, because Parachute ultimately
defaulted on the line of credit, Trenholme would have been obligated to pay
$150,000 regardless of whether he was the principal or the guarantor of the
line of credit.

We
are unpersuaded by this argument for two reasons. First, the circumstances under which
Trenholme agreed to guarantee the line of credit were different from those that
existed when he agreed to act as a principal on the line of credit. The original loan structure, as contemplated
by the letter of understanding, was based on Parachute being able to obtain the
line of credit from a bank. On this
premise, the level of risk for Trenholme to guarantee the line of credit was
tempered by the financial institution's determination that, based on Parachute's
financial position, Parachute was loan-worthy.
Because Parachute did not qualify for a line of credit on its own and needed
Trenholme to be a co-borrower, the level of risk for Trenholme was greater than
when he agreed to guarantee the line of credit.
Moreover, unlike the arm's-length relationship among the parties when
the agreement to guarantee the line of credit was reached in the letter of
understanding, Trenholme and appellants were in a fiduciary relationship when
he co-signed for the line of credit, thus entitling Trenholme to disclosure of
the financial capacity of the guarantor, QRS Systems.

Second,
Trenholme's obligation as principal differs from that of a guarantor. A guarantee is a "collateral contract to
answer for the payment of a debt or the performance of a duty in case of the
default of another who is primarily liable to pay or perform the same." Schmidt
v. McKenzie, 215 Minn.
1, 6, 9 N.W.2d 1, 3 (1943) (quotation omitted).
"The debtor is not a party to the guaranty, and the guarantor is not a
party to the principal obligation." Id.
at 7, 9 N.W.2d at 4 (quotation omitted).
The responsibilities of the guarantor are independent of the promise of
the debtor, and "the responsibilities which are imposed by the contract of
guaranty differ from those which are created by the contract to which the
guaranty is collateral." Id. (quotation omitted). "A guaranty of collection is essentially a
different undertaking, the obligation of which requires the creditor to exhaust
his remedies against the principal (unless insolvency renders it futile), as a
condition precedent to proceeding against the guarantor." Midland
Nat'l Bank of Minneapolis v. Sec. Elevator Co.,
161 Minn. 30,
33, 200 N.W. 851, 853 (1924). Although
Parachute's default may have been inevitable, Trenholme's risk and obligation
as a co-borrower with Parachute were greater than as a guarantor of Parachute's
loan obligation.

Finally, appellants assert that, because
Trenholme's final $50,000 contribution was unrelated to Lien's failure to
disclose QRS Systems's $600,000 debt, it was not induced by a fraudulent or
intentional misrepresentation. We
disagree. Although Trenholme was more
familiar with Parachute's financial status when he made his final $50,000
investment, appellants had a continuing obligation to correct any
misapprehension regarding the suitability of QRS Systems to act as a guarantor
of the line of credit. Without knowledge
of QRS Systems's financial obligations, Trenholme's ability to assess the risk
of the additional $50,000 investment was impaired. The record supports the district court's
finding that Trenholme would not have made the additional $50,000 investment
but for Lien's continuing failure to disclose QRS Systems' $600,000 debt.

The record establishes that Trenholme
was induced to sign the line of credit as a co-borrower because he relied on
Lien's assertion that QRS Systems would act as guarantor for the line of credit. Because Trenholme took on greater risk and
responsibilities by signing the line of credit agreement as a borrower, rather
than as a guarantor for Parachute, he was damaged by his reliance on Lien's material
omissions regarding the financial status of QRS Systems. The record also establishes that this
omission misled Trenholme as to the resources available to Parachute when
Trenholme made the additional $50,000 investment.

In sum, the record supports the
district court's findings that the parties had a fiduciary relationship giving
rise to Lien's duty to disclose material information regarding QRS Systems'
financial status. Trenholme reasonably
relied on Lien's omission when he co-signed
for the line of credit with QRS Systems serving as guarantor, and when he made
an additional investment of $50,000.
Accordingly, the district court did not err by concluding that appellants
are liable for damages arising from Trenholme's claim of fraudulent or
intentional misrepresentation by omission.

Affirmed.

[1] At that time, product development was stalled until
Parachute could pay $25,000 to acquire prototypes for the next model of
Parachute device.